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Pension schemes urged to help members personalise investment strategies

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Pension schemes should facilitate a better model of engagement to encourage members of defined contribution schemes to personalise their investment strategies by helping them set indivi

Pension schemes should facilitate a better model of engagement to encourage members of defined contribution schemes to personalise their investment strategies by helping them set individual journey plans, according to Watson Wyatt.

The firm says that by establishing retirement targets, developing long-term saving journey plans and monitoring progress, members will be better placed to take appropriate actions to ensure they have adequate retirement savings.

These are some of the recommendations contained in a new paper by the firm, entitled Journey planning – a more engaging approach.
 
Gary Smith (pictured), senior consultant at Watson Wyatt, says: ‘In the current environment, where there is so much doom and gloom around pensions, it would be very useful for DC members to be able to put into context where they are on the savings journey relative to where they ought to be. In many cases this would put the benefits of saving for retirement into better perspective and help allay fears about never being able to retire. While DC plans need to recognise that they are unlikely to ever get the majority of their members proactively making savings and investment decisions for themselves, this more engaging approach can, we believe, help encourage a greater number of those willing to engage within DC plans.’
 
According to the paper, there are broadly three categories of members, based on their willingness to be engaged:
 
• The true defaulters:  members who do not have any financial expertise and have no interest in their pension savings, so are likely to remain entirely disengaged.
• The guided-selectors: members who have the potential to be more engaged in their pension savings and have some financial knowledge to support limited decision making. With improved communication and framing of investment options, these members are more likely to achieve an investment structure more suited to their individual needs than a pure default.
• The self-selectors: members who are motivated and financially literate and are able and willing to take investment decisions.
 
Smith says: ‘DC members are more likely to achieve their retirement objectives if they have more clearly articulated goals and the level of interest, ability and tools to support their decision making along the journey.’
 
The firm suggests that by monitoring progress against a target, members would be better placed to understand and manage their exposure to investment risk as necessary – essentially adding a simple, dynamic overlay to an otherwise automated lifecycle strategy. However, it warns that while this approach would be useful for self-selectors, it would be of particular value in encouraging guided-selectors, while true-defaulters will tend to lack the willingness to engage sufficiently. In their case, fiduciaries will need to create default journey plans.
 
Smith says: ‘While the annual benefit statement provides basic information, it does not give members any idea of their progress and is generally not helpful in overcoming the ‘set and forget’ mentality, resulting in decisions made on joining the scheme rarely being changed. What members need is tools, structure and guidance to make informed investment and saving decisions.’
 
In the paper the firm describes how to build a journey plan that will achieve a retirement target by using three elements: contributions, investment risk and retirement date. It asserts that balancing these should be driven by the member based on individual circumstances, risk appetite and ability to contribute to their fund.
 
Smith adds: ‘Retirement targets are the whole point of building a DC fund and if DC members do not know what they are aiming for, it is probably too difficult for them to commit to saving or even to take an interest. By using tools that incorporate investment risk, contributions and retirement dates, members are far more likely to engage and ultimately make a success of their DC pension.’

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